If you are considering taking on a debt, you need to determine if it is good or bad debt. Good debt is one that can help you achieve your specific goals. Bad debt, on the other hand, can be quite expensive and can derail you from fulfilling your goals. Most of the debts fall in either of these categories depending on their terms and how you use them. While some of the debts are good, the lack of managing them well can make them get out of control; thus, they become bad. Let us look at examples in both categories and how you should handle each form to avoid accumulating debt.
Good debt comes with low-interest rates. This can help you raise your net worth or income. Some of the debts that fall under this category include student loans, car loans, and mortgages. Student loans have low-interest rates, thus making it easy for students to make repayments after college. You can manage this debt easily as long as you apply for an amount that you can afford to pay. You should ensure that you handle a student loan so that it does not get out of hand and become bad. Look for repayment options like refinancing the loan.
A mortgage can either be good or bad debt depending on the interest rates attached to it. Taking out a mortgage for a new house is a bold move. You, therefore, need to choose a house that you can afford and borrow the right amount. Ensure you make consistent payments on the mortgage so that you can increase equity and prevent the lender from repossessing your home. It is easy to manage a mortgage as long as you have a stable income and a repayment plan.
Most people borrow loans to buy cars to save on transportation costs. You need to keep the total auto-costs within your take-home pay. The ideal loan term for the vehicle should be at least four years. Work hard to make the necessary repayment within this period. You can also manage car expenses through refinancing.
Bad debt, on the other hand, is one that comes with high-interest rates that make it hard to pay back. Misusing bad debt can make your financial situation even worse. Credit card debt is an example of bad debt. If your credit card has high-interest rates, you may struggle to pay off your balance every month. The building up of credit card debt can even harm your credit score.
You can transform a credit card debt into good debt by paying it off with the help of techniques such as the snowball method. A balance transfer can also help you get more affordable interest rates for the debt. A payday loan can also be bad debt if you don’t handle it well. If you take out a payday loan from vmk, you need to pay it back as soon as you can to avoid sinking into more debt. You should also look for payday loan alternatives before going down this road.